CHAPTER 4

In economics, this want-satisfying

ability is called utility.
 The law of diminishing marginal
theory states that as a consumer uses
up a good or a service, he/she tends
to get less satisfied with it through
time. The greatest satisfaction is
experienced by consuming the first
quantity of the said good.
 SIOMAI TABLE
QUANTITY TU (Total Utility) MU (Marginal Utility)
1 10 -
2 19 9
3 26 7
4 30 4
5 30 0
6 26 -4
 35

30

25
Total Utility (utils)

20

15
TU
10

0
1 2 3 4 5 6 7
QUANTITY

Utility Curve
 10

6
Marginal Utility (Utils)

2
MU
0
1 2 3 4 5 6 7
-2

-4

-6

-8
QUANTITY
 Total Utility, in general, increases as more
and more units of product are consumed.
However, at some point, when the marginal
utility is less than 0, total utility decreases
Marginal utility diminishes as the
consumption of the same good becomes
higher.
 Is the graphical representation of the
amount of goods a consumer can
afford that depends on the goods
price and the buyers income.
 BUDGET LINE
Product Y

BL
Product X
 Is a line concentrating a consumers
responsiveness or indifference based
on a combination of two products.
 INDIFFERENCE CURVE
Product Y

IC

Product X
 Optimum Combination and the
Marginal Rate of Substitution
If we combine the
budget line and
the indifference
curve the
optimum
combination is the
Product Y

highest
indifference curve
that touches the
budget line at a
point of tangency. Product X
 Equimarginal Principle states that the
consumer will get maximum satisfaction
from goods X and Y when the MU of the last
peso spent on good X is exactly the same
as the MU of the last peso spent on good Y,
income being fixed.
 There are many factors that affect the
consumer choices. Consumption of goods
and services constrained by the income of
the consumer and the price of commodity.
In this respect and income effect happen
when the budget line shifted to the right
brought about by an increase in the
consumers budget or a price rollback of
goods X and Y.
 Also known as the water diamond theory of
Adam Smith. This theory involves
comparing the benefit we get from water
with what we get from diamonds.